As of March 11, the coronavirus (COVID-19) outbreak is officially considered a global pandemic. While the spread of the virus has already caused significant global health concerns, a pandemic can do more than just impact your health — it may also affect your business and its financial statements for 2019 and beyond.

An in-depth look at financial reporting

We still don’t know the duration or long-term effects of the COVID-19 outbreak, but the financial impacts are already significant. While preparing your financial statements, it’s time to start evaluating  how this outbreak will change the following aspects of your company: 

• Liquidity and cash flow risks
• Financial aspects, potential impairments, and hedging strategies
• The extent of goodwill and other intangible assets (including those held by subsidiaries) in areas severely affected by COVID-19
• Fair value measurements in a time of high market volatility
• Revenue recognition, especially if your contracts include variable consideration
• Supply chain, including potential changes to inventory and inventory valuation
• Measurement and funded status of pension and other postretirement plans,
• Tax strategies and consideration of valuation allowances on deferred tax assets

It’s also wise to begin monitoring your customer’s credit standing. Declining credit may affect a customer’s ability to pay outstanding balances and require you to reevaluate your ability to allow for bad debts.

Additionally, risks related to the coronavirus may be reported as critical audit matters (CAMs) in an auditor’s report. If your company maintains an audit committee, this is a good time to begin engaging in a dialogue with them.

Best practices for disclosure requirements 

How should your company report the effects of the COVID-19 outbreak on its financial statements? Under U.S. Generally Accepted Accounting Principles (GAAP), companies must differentiate between two types of subsequent events:

1. Recognized subsequent events. These events provide additional evidence about certain conditions, such as bankruptcy or pending litigation, that existed at the balance sheet date. The effects of these events generally need to be recorded directly in the financial statements.
2. Nonrecognized subsequent events. These provide evidence about conditions, such as a natural disaster, that didn’t exist at the balance sheet. Instead, they occured after that date but before the financial statements are issued (or available to be issued). Such events should be disclosed in the footnotes to prevent the financial statements from being misleading. Disclosures should include the nature of the event and an estimate of its financial effect (or disclosure that such an estimate can’t be made).

The World Health Organization declared the COVID-19 outbreak a public health emergency on January 30, 2020. However, events that caused the outbreak had occurred before the end of 2019. For instance, the COVID-19 risk was present in China as of December 31, 2019. Accordingly, calendar-year entities may need to recognize the effects in their financial statements for 2019 and, if applicable, the first quarter of 2020.

We’re in this together

There are many unknowns regarding the spread and severity of the COVID-19 outbreak. We can help you navigate this potential crisis and evaluate its effects on your financial statements. Contact your trusted Smolin professional for help understanding how the latest global developments might impact your financial situation.